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English Court upholds hybrid justice clause

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Edwards Amy
Amy Edwards

Senior PSL - Litigation

London

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09 July 2013

In Mauritius Commercial Bank Ltd v Hestia Holdings Ltd & Sujana Universal Industries [2013] EWHC 1328 (Comm), Popplewell J held that the parties to a loan agreement were able to amend the governing law of an asymmetric jurisdiction clause from Mauritian to English law.

Popplewell J also robustly confirmed the enforceability of asymmetric jurisdiction clauses as a matter of English common law. In doing so, he commented on the controversial decision on the enforceability of such clauses as a matter of EU law handed down by the French Cour de cassation last year in Banque Privee Edmond de Rothschild Europe v X. The decision is a helpful one for parties seeking to rely on such clauses in future.

The Mauritian Lender (the claimant) sued Hestia (the borrower, also Mauritian) and Sujana (the Indian guarantor) in England for sums due under an amended and restated loan agreement, which had been entered into by the parties following defaults by Hestia under an original loan agreement. The original loan agreement had been governed by the law of Mauritius and provided for the exclusive jurisdiction of the courts of Mauritius. The amended and restated agreement contained an English governing law clause and an "asymmetric" or "one-way" English jurisdiction clause as follows:
"24.1 Jurisdiction (a) The courts of England have exclusive jurisdiction to settle any dispute … (a "Dispute").

(c) This Clause 24.1 is for the benefit of the Lender only. As a result the Lender shall not be prevented from taking proceedings related to a Dispute in any other courts in any jurisdiction."

There was also a service of process clause under which Hestia and Sujana appointed an English process agent.
Following further defaults by Hestia, the Lender commenced proceedings in England and served the claim form on the process agent. The defendants challenged jurisdiction on the basis that the asymmetric jurisdiction agreement was invalid under its proper law, whether that be Mauritian or English law.

Their primary contention was that the jurisdiction agreement remained subject to Mauritian law (on the basis that it was not permissible for parties to amend the governing law of a jurisdiction clause) and that it was therefore ineffective as a result of the French Court de cassation decision in Banque Privee Edmond de Rothschild Europe v X1 (covered in the December 2012 European Finance Litigation Review), as Mauritian law is based on French law. The Cour de cassation in Rothschild had found a similarly asymmetric clause to be invalid on the basis that it was one-sided or "potestative" (a concept found in the French Civil code) and that this rendered it unenforceable as a matter of EU law as it was contrary to the object and purpose of Article 23 Brussels Regulation. The defendants further argued that even if the jurisdiction agreement was governed by English law, it was too one-sided to be compatible with fundamental English law principles regarding equal access to justice and should not be upheld.

Choice of law

Popplewell J found that the jurisdiction clause was governed by English law and upheld its validity. The analysis began with a reminder that Article 3.2 of the Rome I Regulation permits parties to change the governing law of their agreement, but excluded from the scope of the Regulation are "agreements on the choice of court". The governing law of choice of court or jurisdiction agreements is instead determined pursuant to English common law rules of private international law.

The judge noted that under English common law the governing law of a jurisdiction clause is, like any other contractual provision, to be determined by the parties’ express choice if they made one, and in general the parties’ intention will be taken to be that it is to be governed by the law applicable to the contract of which it forms part. Popplewell J found that there was no objection as a matter of law or principle under English law for parties to agree prospectively to amend the governing law of their agreement, including their jurisdiction clause. Objections in previous case law (upon which the defendants had tried to rely) related to agreements which had no identifiable applicable law at the outset and in which the parties were meant to elect a governing law at some stage after the contract had been entered into. This created a legal vacuum. The current case was distinguishable because there was an applicable law at the outset (Mauritian) which applied right up until the point the parties agreed to change it to English law.

Popplewell J recognised that there were many reasons why parties may wish to change the governing law of their contracts. There may be unwelcome changes in the law first chosen, or they may only discover unwelcome aspects of that law after conclusion of their contract. The commercial circumstances of the parties may change, for example with a change of control, by reason of which they may wish to choose a new governing law with which they are more familiar. The judge concluded that if commercial parties freely agree to change their governing law, the court would strive to give effect to their bargain unless there are overwhelming policy objections, and there were no such objections in this case.
Popplewell J was also of the view that as a matter of construction the restated facility agreement replaced rather than amended the original loan agreement in any event (ie it was a new agreement between the parties) and accordingly the parties were free to choose its governing law.

Enforceability of asymmetric jurisdiction agreement

Having found that the jurisdiction clause in the agreement was governed by English law, Popplewell J then considered the enforceability of the clause under that law. In doing so, he considered English common law principles rather than the position under Article 23 of the Brussels Regulation as none of the parties to the dispute were domiciled in a Member State. He rejected the defendants’ arguments that, as a matter of construction, the clause allowed the Lender complete freedom to litigate in any court and that it effectively gave the defendants no rights at all to sue in any forum. Popplewell J held that clause 24.1(c) merely provided that the Lender was not prevented from taking proceedings other than in England. It was not an agreement to confer jurisdiction on a foreign court where none would otherwise exist. Further, it did give certain rights to the defendants as clause 24.1 (c) only applied where the Lender was a claimant (not where it was a defendant). The rights conferred on the defendants under the clause were more limited, but the clause did entitle them to sue the Lender in England. The judge noted that such asymmetric provisions, which are of course very common in international credit and bond documentation, "have regularly been enforced by the court" and found this particular clause to be enforceable under English common law. He went on to say that he would not have found that the clause was invalid even if the defendants were right on construction, on the basis that this would have been the contractual bargain to which the court should give effect.

In defending the enforceability of such clauses as a matter of common law, Popplewell J also recognised the commercial rationale behind the use of asymmetric clauses, quoting Professor Fentiman in a recent article in the Cambridge Law Journal (CLJ (2013) 72(1) 24-27):

"Such unilaterally non-exclusive clauses are ubiquitous in the financial markets. They ensure that creditors can always litigate in a debtor’s home court, or where its assets are located. They also contribute to the readiness of banks to provide finance, and reduce the cost of such finance to debtors, by minimising the risk that a debtor’s obligations will be unenforceable. Such agreements are valid in English law … Indeed despite their asymmetric, optional character it is difficult to conceive how their validity could be impugned or what policy might justify doing so…".

Popplewell J then considered whether, if Mauritian law in fact governed the jurisdiction clause, it would be enforceable as a matter of Mauritian law. His views on this question are of interest as it is in this context that he considered the Rothschild decision. The judge found that there was a good arguable case that under Mauritian law the clause would have been treated as valid and effective notwithstanding the decision in Rothschild and, in doing so, noted that the Rothschild decision "is controversial and has been subjected to criticism by commentators, both domestically and in the context of Article 23 which requires an autonomous interpretation".

Jurisdiction based on service on process agent

The judge found that even if the jurisdiction agreement had been invalid, the English court would still have had jurisdiction based on the service of the claim form on the defendants’ English process agent. The service of process clause would not have been invalidated: it was not dependant on the jurisdiction clause, and express severability wording in the contract would also have protected it. Jurisdiction was thus based on CPR 6.11(1) giving the court in personam jurisdiction by the equivalent of in personam service. Popplewell J held that the court should exercise its discretion to assume jurisdiction as England was the forum conveniens – it was a claim under a loan agreement governed by English law where no defence had been advanced suggesting that there would be any need for factual inquiry beyond formal documentary proof.

Comment

The robust defence of asymmetric clauses under English common law provided by Popplewell J in this judgment will be welcomed by participants in the financial markets. Further, although the decision does not resolve the question of whether such clauses are enforceable as a matter of EU law under Article 23 Brussels Regulation, Popplewell J’s observations on the Rothschild decision, including, in particular his description of the decision as "controversial" and his comments about the need for an autonomous reading of the Regulation, will no doubt be relied upon by finance parties as being critical of the Cour de cassation’s approach. Until the position under EU law is clarified by the ECJ, however, risks remain over the use of such clauses in an EU context, particularly where there is a French nexus. Parties will need to continue to balance the perceived advantages of a one-way jurisdiction clause against the risks that it may be found to be void.

In terms of governing law, as Popplewell J recognised, there are many reasons for parties wanting to change the governing law of their commercial agreement. Recent events in the eurozone have led to commercial parties evaluating whether to, for example, amend a contract governed by the law of a vulnerable Member State in favour of the law of a non-vulnerable Member State. This case confirms that, as a matter of English common law, it is possible to amend the governing law of a jurisdiction clause provided it is prospective. Popplewell J expressly declined to decide whether a retrospective change would be possible although he pointed to dicta by Bingham LJ in EI Dupont de Nemours & Co and Endo Laboratories Inc v IC Agnew & ors [1987] 2 Lloyds 585 where it is stated to be "theoretically possible". Parties considering changing their governing law must however consider carefully how this may alter their substantive rights and obligations (and those of any third parties) and the remedies available for any breach.
Finally, the case is a good reminder of why having an English process agent for a foreign defendant is such a good idea. Not only does it make service under a jurisdiction agreement so much easier, it may also mean that if the jurisdiction agreement is, for some reason, invalid, service on the agent may confer in personam jurisdiction on the English court anyway.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.